AFA Legislative Update- Week 8

The Alabama Legislature re-convened on Tuesday, April 28st for its 8th week of work for the 2015 Legislative Regular Session. Meeting on Tuesday and Thursday, the Legislature has now used up 18 of its allotted 30 legislative days. The House has introduced 595 bills and the Senate has introduced 442 bills. The Legislature plans to re-convene Tuesday, May 5th and is supposed to work a normal two day week.

The State’s fiscal situation is clearly the number one item occupying the time of legislators.

dollars2The State of Alabama is a $28 billion enterprise, but the legislature principally focuses on two appropriation bills every year; the approximate $6 billion education fund appropriation and the $1.8 billion general fund appropriation (funds balance of non-education state agencies). The rest of the $20 billion+ expenditures by the state are earmarked monies derived from federal and local sources, fees and taxes.

The FY16 (begins October 1, 2015 and ends September 30, 2016) Education Fund Appropriation bill (SB179) has passed the Senate and is now in the House Ways & Means Education Committee. The FY16 General Fund Appropriations bill (HB135) has not moved out of the House Ways & Means General Fund Committee chaired by Steve Clouse.

Last year’s (FY15) General Fund appropriation was $1.877 billion. Recurring revenues attributed to the General Fund were $1.552 billion. Added to this is $325 million of “one-time” or “non-recurring” funds and prior year carryover. Of this $325 million of “one-time” revenues, $145 million came as a contribution from the corpus of the Alabama Trust Fund; this being the third year of a three year plan to remove money from the ATF to prop up the General Fund.

For FY16, recurring revenues are estimated to be $1.545 billion and available “one-time” funding is estimated to be $45 million, so essentially the state has approximately $1.59 billion of revenue available for the General Fund appropriation.

Governor Bentley has proposed a $2.03 billion FY16 General Fund Appropriation, exceeding projected available revenues of $1.59 billion by $703 million. His budget includes increasing Medicaid by $115 million and Corrections by $40 million and a payment of $32 million, the first of five payments required to payback the ATF General Fund rainy day account (required by the Constitution to be fully paid by 2021).

So where is the extra $703 million going to come from?

The Governor has proposed a projected $541 million in additional taxes and “un-earmarking” $187 million in taxes currently dedicated to the Education Trust Fund.

The $541 million in additional tax revenue is proposed to come from increasing the sales tax on autos ($200 million), increasing tobacco taxes ($205 million), requiring combined reporting for corporate income taxes ($20 million), increasing the financial institution excise tax ($1 million), removing exemptions to the insurance premium tax ($25 million), increasing the public utilities license tax ($47 million), eliminating exemptions for individual income taxes ($12 million) and increasing the auto leasing tax ($31 million).

The Alabama Legislature has not jumped on the Governor’s bandwagon.

They are looking at the General Fund appropriations bill a little differently. From their perspective, they would consider “level-funding” the FY16 appropriations at FY15 levels a great victory.

So, in their view, FY15 spending was $1.877 billion and they have $1.59 billion in revenue as things stand currently. Thus, there is an approximate $300 million “shortfall” that they have to address.

There are many suggested solutions being floated around.

One solution is to reduce expenses by consolidating state agencies and driving efficiencies. SB203 (Orr) would merge the Alabama Forestry Commission with the Department of Agriculture and Industries. It currently is pending before the Senate Finance & Taxation General Fund committee. SB115 (Orr) would phase Alabama out of the business of retail liquor sales. Potentially providing a $15 million annual benefit, it has passed out of committee and awaits consideration before the full Senate. The bill requires implementation by October 1, 2018, so this revenue would not be available until FY19, so it does not help with FY16. HB584 (Holmes) would consolidate the Alabama Historical Commission and the Department of Archives and History.

A second solution is to reduce expenses by reducing public employee benefits. SB410 (Shelnutt) reduces the number of state paid holidays, potentially saving $24 million annually. Bill has passed committee and awaits action before the Senate. HB588 (Greer) also limits the number of paid state holidays for state employees.

A third solution is to reduce expenses by shifting current obligations. HB490 (Clouse) suspends repayment to ATF for FY16.

A fourth solution is to increase revenues by increasing taxes pursuant to the Governor’s plan. None of these bills have been considered in committee; HB139 (McMillan) tobacco tax, HB142 (Hill) requiring combined reporting for corporate income taxes, HB240 (Johnson) repealing withholding exemptions from state income taxes, HB267 (Clouse) increasing sales tax on leased autos to 4%, HB268 (Clouse) increasing sales tax on purchase of autos, HB201 (Greer) increasing the financial institution excise tax, HB276 (England) imposing a public utilities license tax and HB277 (Knight) removing exemptions to the insurance premium tax.

The fifth solution is to increase revenues by taxing gambling activities. Democrats have offered two bills that would create a lottery; HB471 (Ford) is a proposed constitutional amendment to establish a lottery to fund Medicaid and HB472 (Ford) is a proposed constitutional amendment to establish a lottery to fund educational scholarships. Additionally, Republicans are expected to introduce legislation soon; the Marsh Plan would be a constitutional amendment to expand gaming at Poarch Creek Indian Casinos (requiring a Compact), existing dog tracks and create a lottery, and the expected Hubbard Plan that would by statute require a Compact with the Poarch Creek Indians.

A sixth solution is to redirect existing revenue through modifying the Rolling Reserve Act which could potentially “free-up” significant dollars. Estimated receipts for the Education Trust Fund for FY16 are $6.248 billion. The cap imposed by the Rolling Reserve Act is $5.961 billion, leaving $287 million in excess funds. SB281 (Holley), HB330 (Boothe), and HB322 (Poole) all would propose changes to the Rolling Reserve Act. None of these have received any action in committee.

A seventh solution is to redirect existing revenue through removing earmarks. SB12 (Sanford) establishes the Alabama Recurring Revenue Fund and all education and general fund revenues would be directed to the Fund which then would re-distribute the funds on a percentage basis to GF and ETF. This would allow the GF to participate in growth tax revenues. HB533 (Ainsworth) removes all statutorily enacted tax earmarks and directs them to the general fund. HB153 (Poole) is the Governor’s bill to un-earmark certain taxes currently directed to the Education Fund and re-direct them to the General Fund. None of these proposals have been addressed in committee.

Other solutions include HB475 (Knight) setting up a constitutional amendment removing federal taxes paid as an Alabama income tax deduction, HB478 (Knight) setting up a constitutional amendment removing federal income taxes paid as an Alabama income tax deduction while also removing the sales tax on food, and HB477 (Knight) constitutional amendment increasing ad valorem taxes 1 mill for General Fund. None of these bills have moved in committee and, because they require constitutional amendments, are not expected to be considered to help the FY16 appropriations.

As you can see, there are lot’s of proposals being tossed around and discussed.  AFA will continue to monitor these discussions.  Our position is clear…we do not support a “band-aid” approach to managing the state’s finances.  We believe that there is ample existing revenue and plenty of opportunity to continue to drive cost reductions in state government.  Systemic changes are needed in Medicaid, government structure and public employee benefits.  “Band-aid” solutions merely push the real problems down the road.

Stay tuned….


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